The Difference Between a 1099 and a W-2 Tax Form

Is it better to be paid via a 1099 or W-2? Are W-2 and 1099 employees the same? Whether you're starting out as an independent contractor or a new business owner, understanding the difference between a 1099 and a W-2 is essential. Use this blog as your guide in understanding each form, how they differ, and the responsibilities attached to each.  

What Is a 1099 Tax Form?

A 1099 tax form is a way to document money that is sent or received by businesses and individuals. Small businesses can send this form to non-salaried contractors for work or services performed.  

There are 16 different 1099 forms, which serve various business purposes. The most common are 1099-MISC (miscellaneous) and 1099-NEC (non-employee compensation). These forms document funds paid or received that haven’t been subject to income tax. 

Who Completes IRS Form 1099?

If you're a business owner who has worked with contractors who aren't salaried, it is your responsibility to obtain, complete, and distribute the proper Form 1099 to those workers. This form can be obtained from the IRS. 

Things to know about completing IRS Form 1099:

• There is a deadline to submit 1099s to the IRS. The deadline is February 15, 2023, for the 2022 tax year.

• While each specific 1099 form has its limits, you don’t need to issue a 1099 for non-employee compensation or miscellaneous funds if you paid them less than $600 during a tax year. 

• Even though you submit a 1099 to the IRS, you are not responsible for paying income tax on 1099 funds when you submit this documentation — that’s the contractor's responsibility. 

When Will You Receive a 1099?

There is also a deadline for businesses to send contractors their 1099s — for the 2022 tax year, 1099s must be sent by January 31, 2023.

If you’re a contractor and haven’t received your 1099 by this deadline, take the following steps to obtain your form by:

1. Contacting the payer – Your first call should be to the business issuing your 1099. 

1. Contacting the IRS – If you don’t hear from the business before your income tax return is due, contact the IRS. The IRS will provide instructions for filing your income tax return and instructions for submitting your 1099 when you do receive it. 

To issue a 1099 tax form as a small business, you will need to gather details from your contractor before the deadline.  If you are a contract worker, be aware of the tax issues that can cause trouble for 1099 workers. 

What Is a W-2 Tax Form?

Businesses issue W-2 tax forms to traditional employees who were paid $600 or more during a tax year.
If you’ve worked as a traditional salaried employee, your paycheck has probably featured at least three regular deductions for:

1. Withheld income tax,
2. Social Security tax, and
3. Medicare tax.

When these taxes are deducted from your paycheck, your employer pays them to the IRS on your behalf. And at the beginning of the following year, your employer will issue you a W-2 that lists the following:

1. Your gross and net pay throughout the previous tax year 
2. The amounts of federal income, Social Security, and Medicare taxes they paid on your behalf throughout the year

Like a 1099 form, you’ll use your W-2 to file your income tax return for the previous tax year. 

Who Completes a W-2 Tax Form?

While your employer will complete a W-2 tax form and send it to you, the information on your W-2 (and the taxes a business pays on your behalf throughout the year) will depend on critical information from your W-4 tax form. 

A W-4, or Employee’s Withholding Certificate, lists the amount of federal income tax you’d like withheld from your paycheck. Ultimately, it’s up to you to determine how much of your income you’d like to withhold for tax purposes:

• If you choose not to withhold any federal income tax (and you’re not exempt from paying income tax), you’ll owe the IRS your entire total tax bill on the tax filing deadline. 

• If you withhold only a portion of your federal income tax, you’ll owe the IRS some of your taxes on the deadline but not your entire tax liability.

• If you withhold as much as or more than you owe the IRS in federal income taxes, you either won’t have to pay anything at year-end, or you’ll receive a federal income tax refund. This is the most common route for traditional employees. 

While you’ll likely fill out a W-4 when you're hired, you should also fill out a new W-4 if your tax situation changes (e.g., when you get married or have a child).  

When Will You Receive a W-2?

Like 1099s, employers must send W-2s to their employees by a certain deadline, which changes yearly. For the 2022 tax year, this deadline is January 31, 2023.

Like 1099s, if you don’t receive your W-2 by the deadline, you should:

1. Contact your employer
2. Contact the IRS if your employer doesn’t respond to your request or issue you a W-2 before the federal income tax filing deadline

1099 vs. W-2: Similarities and Differences

Forms 1099 and W-2 have a few elements in common:

• Businesses use them to document how much they paid someone for a product or service.
• Individuals or businesses that receive 1099s can use both forms or even a combination of the two to calculate their total tax liability for a calendar year. 
• It’s the recipient’s responsibility to get both forms from the entity that paid them — or reach out to the IRS if they aren’t successful. 

But, there are a few critical differences to keep in mind:

• W-2s are typically issued to traditional salaried employees, while 1099s are typically sent to non-employees or independent contractors.
• In most cases, income taxes have already been paid on the funds listed on a W-2. However, most 1099 funds are typically untaxed. So, 1099 recipients will likely have a bill due on tax day, while W-2 recipients are (usually) already paid in full (or will receive a refund for overpayment). 
• While there’s only one kind of W-2, there are 16 different 1099 forms offered by the IRS.

Filing Your Taxes with IRS Forms 1099 and W-2

Should I do a 1099 or W-2? While you might receive a combination of W-2s and 1099s, you can use both to calculate your total income tax liability for the year:

• Information from W-2s is generally entered in the “Income” section of IRS form 1040.

• Funds listed on 1099s are generally calculated in Schedule 1 of form 1040. Each line in Schedule 1 corresponds to a different type of 1099.

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